[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
o
No
x
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.
x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“
Accelerated filer and large accelerated filer
”
in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter: $607,089.
The number of shares of the Registrants Common Stock outstanding as of July 18, 2017: 75,886,165.
This annual report on Form 10-K and the exhibits attached hereto contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern the Companys anticipated results and developments in the Companys operations in future periods, planned exploration and development of its properties, plans related to its business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as expects or does not expect, is expected, anticipates or does not anticipate, plans, estimates or intends, or stating that certain actions, events or results may, could, would, might or will be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:
prevailing economic conditions which may significantly deteriorate, thereby reducing the demand for the Companys products and services;
regulatory or legal changes affecting the Companys business; and the Companys ability to secure necessary capital for general operating or expansion purposes;
This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled Risk Factors and Uncertainties, Description of the Business and Managements Discussion and Analysis of this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Furthermore, there is no assurance that the Companys line of business will be successful or profitable since it depends, among other things, on (a) the ability of the Company to raise funds, (b) the successful development of our products, and services, and (c) the success of the Companys products, services and opportunities in the marketplace. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.
We qualify all the forward-looking statements contained in this annual report by the foregoing cautionary statements.
PART I
ITEM 1.
DESCRIPTION OF BUSINESS
General
Occidental Development Group, Inc. (ODG, the Company, we, us) was incorporated in the State of Nevada in 1998. The Company provides physical plant and equipment, supplies, services and general support to the legal marijuana industry. Historically, the Company operated in the green building sector offering control and automation technology for single and multi unit new construction and existing buildings.
Over several quarters the Company evaluated and pursued opportunities to expand its business activities vertically within the green building, home automation and energy conservation sectors and horizontally within the construction and renovation sectors. Early in the evaluation process it became clear that the Companys financial resources were not sufficient to support available diversification opportunities, that balance sheet and equity restructuring would be required in order to attract equity funding sufficient to grow the business. Management reached this conclusion concurrent with the close of FY 2013.
Beginning in June 2013 the Company commenced restructuring and in June, 2013 Murat Erbatur resigned as director and COO and in June 2013 the Board of Directors appointed Mr. Ian Gilbey director. Mr. Gilbey had previously been a consultant to the Company providing re-structuring and merger acquisition support. In June the Company moved its head office to Beverly Hills California to better focus on the US market. On July 17, 2013, the Board of Directors authorized a merger with the Companys wholly-owned subsidiary, Occidental Development Group Inc., and in the merger, the name of the company was changed to Occidental Development Group Inc. At the same time the Board also approved the filing with the Secretary of State of Nevada a Certificate of Change that effected a 1:10 reverse split in our outstanding common stock and a reduction of our authorized common stock in the same 1:10 ratio, from 800,000,000 shares to 80,000,000 shares. Both of these corporate actions were permitted to be taken by the Companys Board of Directors without stockholder approval under Nevada NRS 92A.180 (for the merger with the subsidiary and name change) and NRS 78.207 (for the change in authorized and outstanding stock).
The changes of the Companys name to Occidental Development Group, Inc. and the 1:10 reverse split, with the concurrent reduction of our authorized common stock in the same ratio and the change in the Companys trading symbol to OXDG, were approved by FINRA and became effective for trading purposes on August 19, 2013.
During the quarter ended August 31, 2013 the Company continued to plan for the complete phase out of its activities in the home automation sector and negotiations were initiated for the acquisition of Ball Park Investments LLC ("BallPark"). The Company's board of directors considered the acquisition of Ballpark a key step in establishing strategic relationships with debt and equity providers.
Effective September 1, 2013, the Company disposed of its subsidiary MCM Technologies Inc. by sale to a previous related party for $1. The transaction was accounted for by rolling up assets and liabilities into a one-time adjustment of ($342,880) to additional paid in capital. Early in the second quarter management completed the acquisition of BallPark. The acquisition of BallPark did not incur any expense, contribute any assets or result in any liabilities. On January 16, 2014 the Company's Board of Directors approved a consent motion to seek shareholder approval to increase the Company's authorized common share capital from 80,000,000 shares to 800,000,000 and on the same day received approval from a majority of shareholders. As of June 2017, execution of the consent motion to increase the Companys authorized common share capital remains pending. Effective March 1, 2014, the Company disposed of its remaining Canadian
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subsidiary by sale to a third party for $1.00. The transaction was accounted for by rolling up assets and liabilities into a one-time adjustment of ($711,990) to additional paid in capital.
On October 1, 2014 the Company executed a binding Letter of Intent with the Eagle Financial Group (Eagle) defining the terms under which Occidental would acquire Eagle. In January 2015, the Company was advised by the principal of Eagle that Eagle no longer wished to pursue the buyout. As a result of the breach of the binding Letter of Intent by Eagle, the Board is considering the option to pursue a claim of damages.
On April 27, 2015 the Company executed a binding Letter of Intent with 420 International Corp. ("420"), a California company active in the legal marijuana sector. The Letter of Intent outlines an all share transaction in which Occidental acquires 100 percent of the outstanding shares of 420. Under terms of the Agreement, the principal shareholders of Occidental transferred a portion of their shareholdings to the seller in exchange for Occidental receiving 100 percent of the outstanding shares of 420. The acquisition of 420 did not incur any expense, contribute any assets or result in any liabilities and did not result in any change to the Companys total issued and outstanding shares. The share transfer was completed in August 2015.
The Company is actively evaluating opportunities for strategic relationships and alliances, for land acquisition, the provision of professional services, hardware development and hardware and equipment supply, and for industry financing - including evaluating opportunities to make direct term loans or to provide revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. Target geographical markets include national on-line and the California, Oregon, Nevada and Washington medicinal and recreational marijuana (THC and CBD) markets.
The Company maintains its corporate office in Beverly Hills California. The Companys year-end is May 31.
Employees
As of May 31, 2015, we had a staff of two consisting of the Company President and the Company COO.
ITEM 1A
RISK FACTORS
Readers should carefully consider the risks and uncertainties described below before deciding whether to invest in shares of our common stock.
Our failure to successfully address the risks and uncertainties described below could have a material adverse effect on our business, financial condition and/or results of operations, and the price of our common stock may decline and investors may lose all or part of their investment. There is no assurance that we will successfully address these risks or other unknown risks that may affect our business.
Risks Relating to our Business and Industry
Market and Regulatory Conditions and Risks
Our target markets are those where states have legalized the production, sale and use of cannabis. Most recently, voters in California, Nevada, Maine and Massachusetts approved ballot measures to legalize cannabis for adult recreational use, bringing the total number of states with legalized recreational cannabis use to eight, in addition to the District of Columbia.
As of May 31, 2017, twenty eight U.S. states, the District of Columbia and the territories of Guam and Puerto Rico have legalized the use of cannabis for medical use in some form, including five states in 2016 alone. It may take multiple years for a state to establish regulations and for cannabis businesses to begin generating revenue from operations, so the impact of new states legalizing the medical use of cannabis may begin to be realized in 2018 and 2019.
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Continued development of the regulated cannabis industry depends on continued legislative authorization at the state level. Progress, while encouraging, is not assured and any number of factors could slow or halt progress in the cannabis industry.
Cannabis is currently a Schedule I controlled substance under the Controlled Substances Act (CSA) and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the DOJ) defines Schedule I controlled substances as the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. If the federal government decides to enforce the CSA in Colorado with respect to cannabis, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine.
Notwithstanding the CSA, as of the date of this filing, 28 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Washington and the District of Columbia have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.
In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the Cole Memo) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA (see The Cole Memo). In addition, the Financial Crimes Enforcement Network (FinCEN) provided guidelines (the FinCEN Guidelines) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (BSA) obligations (see FinCEN).
Additional existing and pending legislation provides, or seeks to provide, protection to persons acting in violation of federal law but in compliance with state laws regarding cannabis. The Rohrabacher-Farr Amendment to the Commerce, Justice, Science and Related Agencies Appropriations Bill, which funds the DOJ, prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. The Rohrabacher-Farr Amendment is effective through April 28, 2017, but as an amendment to an appropriations bill, it must be renewed annually. The Compassionate Access Compassionate Access, Research Expansion, and Respect States Act (the CARERS Act) has been introduced in the U.S. Senate, which proposes to reclassify cannabis under the CSA to Schedule II, thereby changing the plant from a federally criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.
However, as of the date of this filing, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 has been enacted, the Rohrabacher-Farr Amendment has not yet been renewed beyond April 28, 2017, and the new administration under President Trump has not yet indicated whether it will change the previously stated policy of low-priority enforcement of federal laws related to cannabis set forth in the Cole Memo or the FinCEN Guidelines. The Trump administration could change this policy and decide to strongly enforce the federal laws applicable to cannabis. Any such change in the federal governments enforcement of current federal laws could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government. However, as of the date of this filing, we have provided products and services to state-approved
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cannabis cultivators and dispensary facilities. As a result of our providing ancillary products and services to state-approved cannabis cultivators and dispensary facilities, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.
Absent any future changes in cannabis-related policies under the Trump administration, we intend to remain within the guidelines outlined in the Cole Memo (see The Cole Memo) and the FinCEN Guidelines (see FinCEN), where applicable; however, we cannot provide assurance that we are in full compliance with the Cole Memo, the FinCEN Guidelines or any applicable federal laws or regulations.
The Cole Memo
Because of the discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from federal law that prohibits any such activities, DOJ Deputy Attorney General James M. Cole issued the Cole Memo concerning cannabis enforcement under the CSA. The Cole Memo guidance applies to all of the DOJs federal enforcement activity, including civil enforcement and criminal investigations and prosecutions, concerning cannabis in all states.
The Cole Memo reiterates Congresss determination that cannabis is a dangerous drug and that the illegal distribution and sale of cannabis is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that the DOJ is committed to enforcement of the CSA consistent with those determinations. It also notes that the DOJ is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provides guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the Enforcement Priorities) in preventing:
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the distribution of cannabis to minors;
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revenue from the sale of cannabis from going to criminal enterprises, gangs, and cartels;
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the diversion of cannabis from states where it is legal under state law in some form to other states;
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state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
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violence and the use of firearms in the cultivation and distribution of cannabis;
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drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use;
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the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and
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cannabis possession or use on federal property.
The current administration is reviewing the Cole Memo and it is unclear what further guidance the DOJ may provide concerning cannabis enforcement under the CSA. Until such time as further guidance is provided the Cole Memo remains in effect. We intend to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the Enforcement Priorities set forth in the Cole Memo.
FinCEN
FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations. For purposes of the FinCEN guidelines, a financial institution includes any person doing business in one or more of the following capacities:
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*
bank (except bank credit card systems);
*
broker or dealer in securities;
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money services business;
*
telegraph company;
*
card club; and
*
a person subject to supervision by any state or federal bank supervisory authority.
In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.
In assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
As part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one of the Cole Memo Enforcement Priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcements priorities. A financial institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity reports.
While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain but expected to evolve rapidly, we believe that FinCENs guidelines will help us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.
Moreover, since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find it difficult to deposit their stock with brokerage firms.
Licensing and Local Regulations
Where applicable, we will apply for applicable state and local licenses and permits that are necessary to conduct our business in compliance with local laws.
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Local laws at the city, county and municipal level add an additional layer of complexity to legalized cannabis. Despite a states adoption of legislation legalizing cannabis, cities, counties and municipalities within the state may have the ability to otherwise restrict cannabis activities, including but not limited to cultivation, retail or consumption.
Zoning sets forth the approved use of land in any given city, county or municipality. Zoning is set by local governments or local voter referendum, and may otherwise be restricted by state laws. For example, under certain state laws a seller of liquor may not be allowed to operate within 1,000 feet of a school. There may be similar restrictions imposed on cannabis operators, which will restrict where cannabis operations may be located and the manner and size to which they can grow and operate. Zoning can be subject to change or withdrawal, and properties can be re-zoned. The zoning of our properties will have a direct impact on our business operations.
There is no guarantee that we will be successful in obtaining the required state, city and local approvals and licenses required to operate.
We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.
Although we believe our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also operate in an evolving industry that may not develop as expected. Furthermore, the company continues to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:
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Competition from other similar companies;
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Regulatory limitations on the products we can offer and markets we can serve;
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Other changes in the regulation of medical and recreational cannabis use;
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Changes in underlying consumer behavior, which may affect the business of our customers;
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Our ability to access adequate financing on reasonable terms and our ability to raise additional capital in order to fund our operations;
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Challenges with new products, services and markets; and
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Fluctuations in the credit markets and demand for credit.
We may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our operating results to be worse than expected.
Our independent auditor has issued an audit opinion which includes a statement describing our going concern status. Our financial status creates a doubt whether we will continue as a going concern.
As described in Note 2 of our accompanying financial statements, our limited revenues and our lack of any guaranteed sources of future capital create substantial doubt as to our ability to continue as a going concern. The Company had a working capital deficit of ($1,560,135) at May 31, 2015 and a consolidated net loss of $(324,986) for the twelve months then ended. If the Company does not raise a sufficient amount of capital, it may not have the ability to remain in business until such time, if ever, when it becomes profitable.
Although the Company has continued to restructure its balance sheet and operations, the Companys operating income is not yet adequate to offset the Companys aggregate overhead expenses. To rectify this shortfall, on an operating basis the Company needs to find further ways to reduce overhead expenses and increase its operating revenue sufficient to offset the Companys overhead expense. There is no assurance that the Company will be able to do so.
We expect to expend substantial financial and other resources on:
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personnel, including significant increases to the total compensation we pay our employees as we grow our employee headcount;
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expenses relating to increased marketing efforts;
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strategic acquisitions of businesses and real estate; and
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general administration, including legal, accounting and other compliance expenses related to being a public company.
These expenditures are expected to increase and may adversely affect our ability to achieve and sustain profitability as we grow. Our efforts to grow our business may also be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur losses in the future for a number of reasons, including the other risks described in this Form 10-K, unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.
Until such time as the Company becomes sustainable profitable it will be necessary to raise additional capital to support operations. There is no assurance that the Company will be able to raise the required capital under terms acceptable to management, or on a schedule and in amounts required to support continued operations if at all. Our failure to achieve or maintain profitability could negatively impact the value of our stock.
We have not operated profitably, we may not operate profitably in the future, and we may not survive if we cannot overcome the problems, expenses, difficulties, complications and delays frequently encountered by a company in the early stages of shifting its business activities.
Potential investors must consider our business and prospects in light of the risks and difficulties frequently encountered by companies in the early stages of shifting activities to include new areas of business. These risks and difficulties include, but are not limited to, lack of sufficient customer base, revenue, cash flow and working capital for marketing, inventory for re-sale, property and equipment for leasing and professional staff for sub-contracting. We cannot be certain that our business strategy will be successful or that we will successfully address these and other risks. Our failure to address and mitigate these risks could harm our ability to operate profitably.
Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.
We operate in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis remains illegal.
The United States federal government regulates drugs through the CSA, which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the DEA). Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.
Currently, 28 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has
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confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.
In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the Cole Memo) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA (see Business Government and Industry Regulation - The Cole Memo). In addition, the Financial Crimes Enforcement Network (FinCEN) provided guidelines (the FinCEN Guidelines) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (BSA) obligations (see Business Government and Industry Regulation - FinCEN).
In 2014, the United States House of Representatives passed an amendment (the Rohrabacher-Farr Amendment) to the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice (the DOJ). The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. In August 2016, a 9
th
Circuit federal appeals court ruled in
United States v. McIntosh
that the Rohrabacher-Farr Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the CARERS Act) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.
Although these developments have been met with a certain amount of optimism in the cannabis industry, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted. In addition, the Rohrabacher-Farr Amendment, being an amendment to an appropriations bill that must be renewed annually, has not been renewed beyond April 28, 2017. Furthermore, the ruling in
United States v. McIntosh
is only applicable in the 9
th
Circuit, which does not include Colorado, the state where we currently primarily operate. The new administration under President Trump has not yet indicated whether it will change the previously stated policy of low-priority enforcement of federal laws related to cannabis set forth in the Cole Memo or FinCEN Guidelines. The Trump administration could change this policy and decide to strongly enforce the federal laws applicable to cannabis.
Any such change in the federal governments enforcement of current federal laws could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government. However, as of the date of this filing, we are beginning to provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result of our providing ancillary products and services to state-approved cannabis cultivators and dispensary facilities, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.
Additionally, as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and distributing medical or recreational cannabis, should we determine that such activities are in the best interest of the Company and our stockholders. Any such pursuit would involve additional risks with respect to the regulation of cannabis.
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Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.
Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its sale and distribution, or the re-criminalization or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations could restrict the products and services we offer or impose additional compliance costs on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to our business.
The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.
We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in a growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.
Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current cannabis pill sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical, or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.
We may change our business plan.
Based on the results of our efforts to develop our current operating concept, we are re-evaluating our business plan and our board of directors may determine that it is in the best interests of the shareholders to change our business plan through vertical diversification within the Companys current business sector and/or horizontal diversification into related sectors. Any such expansion of operations will entail risks, and such actions may involve specific operational activities which may negatively affect the profitability of the Company. Consequently, shareholders must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to the Company at that time, and (ii) management of such expanded operations may divert managements attention and resources away from its existing operations, all of which factors may have a material adverse effect on the Companys present and prospective business activities. In addition, we may need to bring in new investors or raise additional capital, all of which could result in dilution of current shareholders. There is no guarantee that our efforts to diversify will be successful.
We require additional funds to achieve our current business strategy and our inability to obtain additional financing would inhibit our ability to expand or even maintain our business operations.
We need to raise additional funds through public or private debt or sale of equity to achieve our current business strategy and capitalize on available opportunities. This financing may not be available when needed. Even if this financing is available, it may be on terms that we deem unacceptable or are materially adverse to shareholder interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our inability to obtain financing would inhibit our ability to implement our development strategy, and as a result, could require us or diminish or suspend our development strategy and
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possibly cease our operations. If we are unable to obtain financing on reasonable terms, we could be forced to delay, scale back or eliminate planned expansion and or introduction of new products and services. In addition, such inability to obtain financing on reasonable terms could have a negative effect on our business, operating results, or financial condition to such extent that we are forced to restructure, file for bankruptcy, sell assets or cease operations.
We currently have outstanding debt that is convertible into shares of our common stock at below market pricing resulting in significant dilution to our current stockholders.
At May 31, 2015 we had a total of $838,957 in debt and accrued interest that is convertible into shares of our common stock at discounts ranging from 0% to 42% of the market price. The conversion of all of this debt could result in significant dilution to our stockholders.
We rely heavily on our management, and the loss of their services could materially and adversely affect our business.
The Companys business is significantly dependent on the Companys management team and Board of Directors. The unscheduled loss of these individuals would have a material adverse effect on the Company.
Market events and conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on our ability to fund our working capital and other capital requirements.
Notwithstanding various actions by the U.S. and foreign governments, concerns remain about the general condition of the capital markets. Recent quarters have seen strong improvement in the US economy and increased positive consumer sentiment. However the overall situation with small cap funding remains somewhat fragile and could, among other things, make it difficult for us to obtain working capital, or increase our cost of obtaining capital for our operations. Our access to additional capital and project financing may not be available on terms acceptable to us or at all.
The Companys operating results may vary and may not support ongoing development of the business
The Companys operating results may fluctuate significantly from period to period as a result of a variety of factors including but not limited to: purchasing patterns of customers, competitive pricing and margins, debt service and principal reduction payments, and general economic conditions. There is no assurance that the Company will be successful in marketing its products and services or that the revenues from the sale of such products and services will be sufficient to offset costs and support ongoing development of the business.
Unanticipated Obstacles to Execution of the Business Plan
The Companys business plans may change significantly. Many of the Companys potential business endeavors are capital intensive and may be subject to statutory or regulatory requirements. Management believes that the Companys goals and strategies are achievable in light of current economic conditions and regulatory environments with the skills, background, and knowledge of the Companys principals and advisors. Management reserves the right to make significant modifications to the Companys stated strategies depending on current and anticipated future events.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
We may be required to establish strategic relationships with third parties in both domestic and international markets. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control. We can provide no assurance that we will be able to establish and maintain strategic relationships in the future.
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In addition, any strategic relationships that we establish, will subject us to a number of risks, including risks associated with sharing and potentially losing control over committed assets and financial resources, technical information and know-how, loss of control of operations that are material to our business. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by our exposure to a number of factors that are outside of our control.
We face risks associated with strategic acquisitions.
As an important part of our business strategy, we plan to strategically acquire businesses and real property, some of which may be material. These acquisitions may involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:
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The applicable restrictions on cannabis industry and its participants limit the number of available suitable businesses and real properties that we can acquire;
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Any acquired business or real property could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;
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We may incur or assume significant debt in connection with our acquisitions;
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Acquisitions could cause our results of operations to differ from our own or the investment communitys expectations in any given period, or over the long term; and
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Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs.
Additionally, following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.
We may record goodwill and other intangible assets on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
Our potential customers, clients and tenants have difficulty accessing the service of banks, which may make it difficult for them to operate.
On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed cannabis businesses. A memorandum issued by the Justice Department to federal prosecutors reiterated guidance previously given, this time to the financial industry that banks can do business with legal marijuana businesses and may not be prosecuted. FinCEN issued guidelines to banks noting that it is possible to provide financial services to state-licensed cannabis businesses and still be in compliance with federal anti-money laundering laws. The guidance, however, falls short of the explicit legal authorization that banking industry officials had requested the government provide, and, to date, it is not clear if any banks have relied on the guidance to take on legal cannabis companies as clients. The aforementioned policy can be changed, including in connection with a change in presidential administration, and any policy reversal and or retraction could result in legal cannabis businesses losing access to the banking industry.
Because the use, sale and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. The inability to open bank accounts with federally regulated banks may make it difficult for our existing and potential customers, clients and tenants to operate and may make it difficult for them to contract with us.
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Risks Related to Our Common Shares
Dividend Record
We have no dividend record. We have not paid dividends on our common shares since incorporation and do not anticipate doing so in the foreseeable future.
The trading market for our common stock is limited.
We are quoted on the OTC Markets Groups OTCQB Over-the-Counter Bulletin Board under the trading symbol OXDG. The OTCQB is regarded as a junior trading venue. This may result in limited shareholder interest and hence lower prices for our common stock than might otherwise be obtained.
The market price of our common stock may fluctuate significantly.
The market price of our common shares may fluctuate significantly in response to factors, some of which are beyond our control, such as:
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the announcement of new products or product enhancements by us or our competitors,
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developments concerning intellectual property rights and regulatory approvals,
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quarterly variations in our and our competitors results of operations,
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changes in earnings estimates or recommendations by securities analysts,
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developments in our industry, and
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general economic and market conditions, and other factors, including factors unrelated to our own operating performance.
Further, the stock market in general has recently experienced price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common shares, which could cause a decline in the value of our common shares. You should also be aware that price volatility might be worse if the trading volume of our common shares is low.
Our stock is a penny stock. Trading of our stock may be restricted by the SECs penny stock regulations, which may limit a stockholders ability to buy and sell our stock.
Our stock is a penny stock. Broker-dealer practices in connection with transactions in penny stocks are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system), in companies continuously in existence for at least three years with net tangible assets of less than $2,000,000. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customers account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities.
These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
FINRA sales practice requirements may also limit a stockholders ability to buy and sell our stock.
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In addition to the penny stock rules promulgated by the Securities and Exchange Commission (see above for discussions of penny stock rules), the FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customers financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our stockholders may experience significant dilution.
We may have a significant number of warrants and options to purchase our common stock, the exercise of which would be dilutive to stockholders. The exercise prices may be subject to adjustment if we issue or sell shares of our common stock or equity-based instruments at a price per share less than the exercise price then in effect. In such case, both the issuance and the adjustment would be dilutive to stockholders.
We may from time to time finance our future operations or acquisitions through the issuance of equity securities, which securities may also have rights and preferences senior to the rights and preferences of our common stock. We may also grant options to purchase shares of our common stock to our directors, employees and consultants, the exercise of which would also result in dilution to our stockholders.
We may face continuing challenges in complying with the Sarbanes-Oxley Act, and any failure to comply or any adverse result from managements evaluation of our internal control over financial reporting may have an adverse effect on our stock price.
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Section 404 requires us to include an internal control report with our Annual Report on Form 10-K. The report must include managements assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified.
Failure to comply, or any adverse results from such evaluation, could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our equity securities. Management believes that our internal controls and procedures as of May 31, 2015 were not effective to detect the inappropriate application of U.S. GAAP rules. Management realizes there are deficiencies in the design or operation of our internal control that adversely affect our internal controls, and management considers such deficiencies to be material weaknesses. As of the end of our last fiscal year, management had identified the following material weaknesses:
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we had not performed a risk assessment and mapped our processes to control objectives;
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we had not implemented comprehensive entity-level internal controls;
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we had not implemented adequate system and manual controls; and
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we did not have sufficient segregation of duties.
Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we will be able to conclude that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree
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with our managements assessment or conclude that our internal control over financial reporting is operating effectively.
ITEM 1B
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
We maintain our statutory registered agents office in Reno, Nevada and our principal executive office is located at 256 Robertson Blvd, Beverly Hills California 90211. We currently do not have office leases or rental cost for the office space utilized by the Company.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently involved in any litigation, nor do we know of any threatened litigation against us that would have a material effect on our financial condition.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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In addition to those Exhibits shown above, the Company incorporates the following Exhibits by reference to the filings set forth below: